Home Capital Group Inc (TSE:HCG), a CA$1.23b small-cap, is a financial services company operating in an industry, which is impacted by macroeconomic factors such as interest rate changes and inflation. House price index and the stock market rebound are also indicators of higher consumer and business appetite for credit. Financial services analysts are forecasting for the entire industry, a strong double-digit growth of 11.5% in the upcoming year , and a robust short-term growth of 26.2% over the next couple of years. However, this rate came in below the growth rate of the Canadian stock market as a whole. Is now the right time to pick up some shares in mortgage and thrift companies? Today, I will analyse the industry outlook, and also determine whether Home Capital Group is a laggard or leader relative to its financial sector peers.
View our latest analysis for Home Capital Group
What’s the catalyst for Home Capital Group's sector growth?
The mortgage industry is characterized by stable product offerings, consolidation and increasing levels of external competition. Over the past year, the industry saw growth in the teens, though still underperforming the wider Canadian stock market. Home Capital Group leads the pack with its impressive earnings growth of 95.5% over the past year. However, analysts are not expecting this industry-beating trend to continue, with future growth expected to be 1.9% compared to the wider mortgage and thrifts sector growth hovering in the teens next year. This growth is a median of profitable companies of 6 Mortgage companies in CA including Genworth MI Canada, MCAN Mortgage and Timbercreek Financial. As a future industry laggard in growth, Home Capital Group may be a cheaper stock relative to its peers.
Is Home Capital Group and the sector relatively cheap?
The mortgage and thrifts sector's PE is currently hovering around 11.53x, relatively similar to the rest of the Canadian stock market PE of 16.23x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a lower 8.2% compared to the market’s 10.5%, potentially indicative of past headwinds. On the stock-level, Home Capital Group is trading at a PE ratio of 9.74x, which is relatively in-line with the average mortgage and thrifts stock. In terms of returns, Home Capital Group generated 6.6% in the past year, which is 1.6% below the mortgage and thrifts sector.
Next Steps:
If Home Capital Group has been on your watchlist for a while, now may not be the best time to enter into the stock. The company is a mortgage and thrifts industry laggard in terms of its future growth outlook, and is trading relatively in-line with its peers. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the financial sector. However, before you make a decision on the stock, I suggest you look at Home Capital Group's fundamentals in order to build a holistic investment thesis.
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Historical Track Record: What has HCG's performance been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Home Capital Group? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.